Tax Policy

Pursuant to a congressional request, GAO reviewed the research and experimentation tax credit to determine: (1) who used the credit; and (2) how the credit's constraints affected use.

GAO found that large corporations used 77.6 percent of the total credit claimed in tax years 1981 through 1984. In addition, GAO analyzed income tax returns from 1981 through 1984 for a sample of 927 large corporations, and found that: (1) manufacturers earned and used most of the credit; (2) corporations in the sample would have earned the same amount of credit using an alternative, flat-rate credit of 3 percent of the qualified research expenditures in 1981 and 5 percent in 1982; (3) the 50-percent-of-current-year-expenditures limit reduced the amount of credit claimed by 5 percent in 1981 and by less than 0.5 percent in 1984; (4) the amount of credit used compared to the amount available declined from 91 percent in 1981 to 78 percent in 1984, indicating that the corporations carried forward more credit; (5) the 50-percent limit affected 11.4 percent of the corporations in 1981 and 4.5 percent in 1984; (6) the percent of corporations in the sample whose spending was below the base-period constraint, and thus could not earn a credit, rose from 21.8 in 1981 to 43.6 in 1984; (7) corporations whose spending was below the base-period constraint accounted for 4 percent of total spending by sample corporations in 1981 and 7.9 percent in 1982; and (8) corporations whose qualified research expenditures grew steadily over the 4-year period, but never exceeded twice their base, earned 78 percent of the credit.